United States automotive

Key player - Tesla

August 2nd 2017 | United States | Passenger vehicles | Tesla

Tesla's Model 3 has finally arrived, but the company has much to prove as it ventures into the mass market.

Tesla is one of the trailblazers in electric vehicle (EV) technology. Despite the sparsity of battery-charging infrastructure and drivers' preference for petrol-powered cars, it successfully launched its first electric car in the US in 2012. Since, it has garnered worldwide acclaim and sales have surged to US$7bn in 2016 from a mere US$204m in 2011. Until now, the company has made only luxury vehicles, but following the first deliveries of its much-anticipated Model 3 sedan on July 28th it is finally breaking into the mass market.

The July launch is a vindication for the company, which had become known for missing deadlines. It recently overtook General Motors (GM) to become the most valuable auto company in the world. Yet it still faces huge challenges as it scales up Model 3 production to meet demand and justify its high stock market valuation. Given its heavy investment needs, Tesla has never turned an annual profit.

In the first quarter ended March 31st, rising demand for the Model S, the company's premium electric sedan, and the Model X led to record deliveries of 25,000 units. Revenue for the period more than doubled to US$2.7bn. Even so, Tesla's net loss widened to US$330.3m, from US$282.3m a year earlier—its 22nd loss in 24 quarters.

Market position

Founded in 2003, the company was named after Nikola Tesla, a Serbian-American inventor. Among Tesla's co-founders was Elon Musk, the billionaire entrepreneur who is its largest shareholder and current chief executive. Its first electric car, the Tesla Roadster, was launched in 2008 and able to accelerate to 60 mph (97 km/h) in under four seconds and travel 245 miles (394 km) on one charge. The early model faced a number of problems, however, including frequent breakdowns and reports of cars getting stuck in second gear.

Next, in 2012, Tesla launched the first full-sized, premium-electric sedan, the Model S. Compared with EVs then on the market, it had a huge driving range and received the highest-ever US safety rating of 5.4 stars. It was therefore a hit with customers despite its sticker price of US$60,000 for a basic model, almost twice that of the Nissan Leaf, the world's leading EV, and around three times that of conventional vehicles such as the Ford Fusion and the Chevrolet Cruze. The Model X, a luxury crossover sports utility vehicle (SUV), followed in 2015.

By 2016, Tesla's total unit sales had risen to 76,000 vehicles. Of these, 46,550 were sold in the US, where Tesla was the market leader with a 29% share of the EV market. Unit sales in China were around 11,000 vehicles, leaving sales of just 18,450 in the rest of the world. Globally, Tesla was outranked on EV sales in 2016 by Renault-Nissan (France-Japan), which sold 94,265 EVs, and BYD of China, which sold 100,183, but if all goes to plan may take the lead in 2018. GM does not break out its global EV figures.

Revenues rose by 73% in 2016 to US$7bn, of which the US accounted for US$4.2bn, while China brought in around US$1bn. Around 80% of the total comes from its automotive arm, with the rest from its clean-energy arm, which encompasses power storage systems and solar roofs. In May 2015 it launched Tesla Energy, a battery system to power homes, utilities and commercial buildings. Then in November 2016 the company acquired SolarCity Corp, a power company founded by Musk's cousins.

Heavy investment in this and the Model 3 launch meant the company reported a net attributable loss of US$674m in 2016, though this was down from US$889m in 2015. Nevertheless, thanks to its dominance of the US EV market and of media headlines, Tesla has strong financial support. Its market value has risen from US$1.3bn at the time of its initial public offering (IPO) in 2010 to a whopping US$58bn in July 2017, topping that of GM. With its new identity now stretching beyond the automotive market, the company has now dropped "Motors" from its name and become simply "Tesla Inc".

Corporate strategy

Tesla's founding mission is "to accelerate the world's transition to sustainable energy". Having claimed the top spot in luxury electric-vehicles, it is now turning to the mass market, and intends to move its price point steadily downward. Unveiled in March 2016, the Model 3 sedan is expected to be priced at US$35,000 before incentives.

Pre-orders already top 500,000, but meeting this demand will be a huge challenge for Tesla. By starting deliveries in July, the company has at least avoided the two-year delay it had with the launch of the Model X. However, Tesla has so far been a small-scale carmaker, and its plans to fulfil all those pre-orders by the end of 2018 remain ambitious. The company expects to end the year with a production rate of 5,000 vehicles per week and to double that next year.

Capacity is not an issue: the company already has a huge production plant in California, formerly owned by GM and Toyota. However, getting production lines rolling smoothly is another thing. Tesla has also been upgrading its "Gigafactory 1", a lithium-ion battery plant located in Nevada, and the automaker is aiming to double its network of public charging stations. It currently has over 5,000 "supercharger" networks, and 9,000 "destination charging connectors" that are installed at hotels and restaurants. In total, Tesla plans US$2bn-2.5bn in capital expenditures in 2017 to facilitate the roll-out of the Model 3.

Tesla also wants to expand beyond the auto industry and help meet the demand for renewable power in homes. Following its acquisition of SolarCity, Tesla plans to manufacture its solar panels and customisable solar roofs at Gigafactory 2, located in Buffalo, New York, from the second half of 2017. That will leave Gigafactory 1 free to mainly produce batteries for the Model 3.

To fulfil all its plans the company will need to build up strong cash reserves. Long-term debt stood at US$5.9bn at the end of 2016, compared with cash and equivalents of US$3.4bn. Investors have been wary of cost overruns related to the Model 3 despite continuous capital injections by Mr Musk. In February, Tesla said that it would bring back its first chief financial officer (CFO), Deepak Ahuja, after Jason Wheeler's departure in April. In the latest round of stock-and-debt sale in March, the company sought to raise US$1.2bn.

The going has not been all smooth. Besides the delayed launch of the Model X SUV, Tesla has issued two major vehicle recalls in the past couple of years (neither raised any major safety concerns). More recently, Tesla has grappled with increased scrutiny of its "autopilot" self-driving technology after the software was linked to vehicle accidents in the US and China. The feature has been cleared by US highway regulators, but the company still faces a class-action lawsuit that may dampen consumer confidence.

What to watch for

Tesla is unlikely to turn a profit reliably in the near future but shows no signs of reining back on its ambitions. Its future plans include expanding into making commercial vehicles, including passenger buses and heavy-duty trucks set to be unveiled in 2018. Mr Musk has also reaffirmed plans to the company's planned Model Y crossover sports utility vehicle (SUV) by 2019, as well as a "new kind of pick-up truck". Ambitious plans are afoot for Tesla's autonomous driving software, too, despite the intense scrutiny. Mr Musk says Tesla is working to make its cars fully autonomous by as early as 2018.

This year, Tesla intends to enter markets in the Middle East and Asia. In February it said that it had started taking orders in the UAE for the Model S and Model X. Deliveries are scheduled for later this year. In the meantime, Tesla will spend "tens of millions of dollars" to set up charging stations and other supporting infrastructure. Looking beyond automobiles, Tesla wants to build on its energy storage products, integrating them with its power generation business and its auto recharging systems.